March 28, 2002

    Recognizing the critical importance of reforms in the electricity distribution sector, the Ministry of Power, had constituted a committee under the chairmanship of Shri Ashok Basu, Secretary, Ministry of Power, to study the issues related to distribution sector including privatization of distribution. The committee after analysis of the complex issues and problems that confront the distribution sector, submitted its report to the Power Minister Shri Suresh Prabhu in a ceremony held at Delhi. The members present at the function included of Shri Ashok Basu, Shri Ajay Shankar, Joint Secretary (R&R), Ministry of Power, Shri R. V. Shahi CMD Bombay Subarban Electric Supply, Dr V.V. Desai, Retd. Director General & Chief Economist, ADB and representatives of ICICI Energy Group.

    The committee recognized that a number of important suggestions have been made in the past for improvements in the distribution sector, but the implementation of the suggestions has been uneven across the country and significant progress towards attainment of efficiency gains is yet to be made. Since reforms in the distribution sector are primarily the prerogative of the state, the committee has emphasized an urgent need for the states to delineate and crystallize the strategy to be followed for reforms in distribution.

    Although it is likely that states may take different views on the strategy for reforms, it has been suggested that the focus of the entire exercise should be to bring about commercial orientation within the sector and provide quality service at a reasonable price to all consumers. The committee has suggested that these objectives would be extremely difficult to achieve without addressing the issue of governance. Although, states may take a view to consider a model for good governance within the existing framework such as co-operatisation, corporatisation etc., the success of this strategy would depend on the insulation of the sector from the dysfunctional compulsions of the political process, which considering the past would be a strong challenge. However, the bottom line would be that the sector must achieve commercial viability in two to three years.

    Based on the international and domestic experience of states, which have already undertaken the reform program, the committee has suggested a time bound action plan for reform in distribution. The actions include a) Improvement in efficiency of operations wherein it has been suggested that actions that would enhance the operations, improve the efficiency of operations and increase accountability of the state utilities need to be pursued immediately. b) Rural Electrification wherin it has been acknowledged that the very nature of rural supply with higher costs, lack of ability to pay as well as the socio-economic objectives would necessitate a customized approach for the rural segment. The committee has suggested that rural electrification would have to be treated, as part of the socio economic development plans of the village and the investments would need to be supported from the budget preferably in the form of grants. Further, rural electrification would need to be managed by rural cooperatives or rural entrepreneurs approved by the local communities or through franchisees or through panchayats and c) Privatization of distribution business, as in the case of many other countries, is expected to benefit the government, the sector and consumers at large. However, the mere act of privatization would not result in immediately resolving the various problems within the sector. There is a need to carefully focus on the transition path and the strategy to be followed for optimizing the benefits of privatization.

    For privatization to be successful, considerable amount of preparatory work would need to be undertaken preceding privatization with a view to creating a conducive environment. The committee has indicated that privatization of distribution would include adopting an appropriate model and a suitable independent regulatory system. Further, the pace of privatization would depend upon the model adopted. Experience in Orissa and in other states also helps in highlighting issues that need to be thought of for an appropriate investment framework. The process of distribution privatization would necessarily have to focus on resolving the transition issues related to distribution operations such as past losses, receivables, subsidy etc. The appropriateness of any given form of privatization, as well as its pace would be determined by the specifics of individual state administrations (e.g. political commitment, implementation capacity), as well as the circumstances of respective SEBs (e.g. financial situation, consumer profile, system performance).

    However, certain generic issues would have to be taken into account in developing a policy towards privatization of distribution. Further, it would be important to develop time frame for the various actions in terms of what can be achieved within 6 months (short term), over a period of twelve months (medium term) and over a period of eighteen months (long term), all of these actions, however, would need to be initiated immediately. It is likely that few of these actions that are initiated, may not be completed within the suggested timeframe on account of various reasons including logistics management, external environment changes etc. and may continue beyond the time period indicated. However in such a scenario immediate initiation and completion on the other actions would still be needed to provide important signal to various stakeholders about the commitment of the authorities.

    The action points recommended by the committee in the three segments of the strategy include metering, distribution circle management and anti theft legislation to be completed within six months pertaining to improvements in efficiency of operations. The funding of rural electrification plans in the form of subsidy preferably in the form of grants and rural areas to be managed by rural co-operatives, panchayats, local entrepreneurs or franchisees. In relation to privatization of distribution, the committee has suggested that the state governments should appoint agencies for determining the base line data, deciding on the incentives for loss reduction exceeding the agreed loss reduction levels and the centre should release a tariff policy, all these to be undertaken in the short term. There would be a need to market the benefits of privatization to all the stakeholders, identifying investors including independent power producers to take up distribution and institutional strengthening of State Electricity Regulatory Commissions/Central Electricity Regulatory Commissions, to be undertaken in the medium term and finally selection of the model for privatization and deciding on the transition path for the long term. Further the committee has recommended that the centre should incentivize the states to undertake reforms by linking reform initiatives with the activities of central public sector utilities such as National Thermal Power Corporation, Nuclear Power Corporation, Power Grid Corporation of India Limited etc.

    The other members of the committee included Shri J.L.Bajaj, Chairman UPERC, Shri Jairam Ramesh, Deputy Chairman Planning Board, Karnataka, Shri K.V. Kamath, CMD ICICI, Shri Deepak Parekh, Chairman IDFC, Shri Sumantra Banerjee, MD CESC, Shri Charles Lenzi, AES CESCO, Shri T.L. Sankar, Principal Secretary Power, GoNCT Delhi, Principal Secretary, Energy, GoAP, Shri S.J. Coelho, Shri Birendra Kumar, MD&CEO, SBI Caps Market Limited, Shri Rajendra Singh, ex CMD, NTPC. and Shri G. Sanjeeva Reddy, President, INTUC. The committee was assisted by the Energy Group of ICICI.